Somalia must now engage the recovery gear to attract more investors

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The Horn of Africa Nation will need to put its act together in several key areas that form crucial links between potential investors and the opportunities available.

The international community, including the World Bank Group, believes the task ahead of the Federal Government of Somalia is daunting.

“The transitional administration will have to strive as much as possible to create a peaceful and secure environment, build strong institutions of governance and deliver key public services to a weary population after decades of war. These challenges can only be overcome if the FGS (Federal Government of Somalia) takes a leading role to sustain economic reconstruction by creating a stable macroeconomic environment that would underpin rapid economic growth, job creation, and poverty reduction,” the World Bank noted in her economic update for Somalia released late last year.

Like many post-conflict economies, Somalia has the challenging task of economic reconstruction before meaningful growth can take off.

Countries that have undergone conflicts are usually divided, with several factors at play during the conflict. One side of the conflicting parties always ends up economically superior or better than the other. The result is that those areas whose involvement in the conflict resulted in economic losses remain largely disadvantaged, dissatisfied and disinterested in any meaningful order or peace.

A balance can only be achieved when the federal government has the capacity to attain intra-governmental fiscal relations that serve to attain reasonable equality in the country.

An achievement towards lasting peace, which is crucial for economic growth in Somalia, will depend on the level of shift from its current emerging de facto architecture of fiscal arrangements. Wealth is concentrated in the hands of a few.

“Somalia’s new fiscal arrangements should be designed to work as a coherent system, preserving a strong common economic space across the country, and provide scope to address inequities between regions. As political bargains are struck, regard should be given to the balance between functional responsibilities and the availability of revenue to fund them. Another recommendation is that Somali stakeholders should be prepared to develop a sustainable fiscal bargain incrementally, renegotiating as fiscal circumstances and the interests of states and federal government change over time,” the World Bank states.

UNDP’s Post Conflict Economic Recovery report released in 2008 identified the country as one with a great potential, but which must also gear up to adopt reforms identified as best international practice in  any country.

It may not be possible to find a permanent fiscal bargain immediately. The focus now should be developing robust intergovernmental institutions to facilitate ongoing negotiation, and on negotiating a way forward rather than a final fiscal arrangement.

The efforts to address the climate to tap investment has been made, but more still need to be done. As in the FGS and Puntland, the security sector in Somaliland accounts for the largest share of total expenditure, averaging 46 per cent in 2011–13. The second-largest spending category – administration and general services sector – accounted for about 29 per cent in the same period. The two sectors accounted for more than 70 per cent of spending in the Somaliland budget, with the remainder allocated to the economic and social services sectors.

Spending on economic services averaged 13 per cent in 2011–13, and that of social services, mainly health and education, accounted for 12 per cent of the total expenditure

World Bank estimates show that the growth in Somalia could accelerate in 2015–17 if the fragile peace in the South-Central region continues, AMISOM troops continue to contain Al Shabaab, the FGS gains more territorial presence, and the international community continues to support the FGS.

The security situation profoundly affects investment, trade, and fiscal and monetary policies. A fundamental precondition for macroeconomic viability in the short to medium term is a durable resolution of political differences.

2016 elections

A first test of stability will be the electoral transition slated for 2016. If elections are peaceful and credible, consumption, investment, and foreign inflows (remittances, donor flows, and FDI) are likely to increase. Much of the increased investment is projected to be used to purchase imported equipment to renovate dilapidated infrastructure and housing, leading to strong growth in imports.

The security situation in Somaliland and Puntland is adequate for economic activity. In contrast, problems in the South-Central region make growth difficult for now. The fight to eradicate the militants has slowed down economic activity, especially in Mogadishu, as most government resources go to the security sector.

Given the precarious security situation, fundamental economic reforms are unlikely to receive the priority they deserve. Security challenges also discourage the private sector from investing in long-term production-oriented activities. Any deterioration of security and government stability, including a fallout from the 2016 general election, will have an adverse impact on revenue by limiting the government’s ability to collect taxes and reducing growth prospects. If security declines, macroeconomic projections are unlikely to be realised in 2015–17.

The international community will be watching to see how the election proceeds. There is a possibility that foreign assistance could decline if political stability is not maintained. Given Somalia’s dependence on foreign aid, any disruption in donor support would severely curtail budget implementation.

Foreign assistance is channelled both on and off budget. Direct budget support from donors represented 36 per cent in 2013 and 39 per cent in 2014. Off-budget donor financing totalled US$137.1 million (73 per cent of the 2014 budget).

The inheritance from conflict is that the overall economic policy and institutions are typically very poor. Commonly, over-regulation of formal economic activity coexists with a large illegal economy. High trade barriers are widely evaded by criminals.

A major reform that the administration will have to address is the application of policies to ease business and encourage investors.

Post conflict economies are not easy to build. Investors will be cautious strategies for lasting stability are firmly in place and commitment to the same is visible.